How to Improve Your Accounts Receivable Turnover: Practical Tips

When running a small or mid-sized business, you can’t afford to wait too long for your customers to pay. Sales might look good on paper, but if cash sits in unpaid invoices, your actual working capital—and ability to grow—takes a hit. That’s where a key metric called the accounts receivable turnover ratio comes in. It shows how quickly you convert your receivables into cash over a specific period. If this ratio is low, it might mean your clients take longer to pay, or your internal systems aren’t pushing for timely payment.

In this article, we’ll explore what the ratio is, how to calculate it, and, most importantly, how to improve your accounts receivable turnover so your business stays liquid and ready to take on new opportunities.

Introduction: Why Accounts Receivable Turnover Matters

Cash is the lifeblood of a business. You might sell great products or services, but if customers pay late, your operations suffer. Bills pile up, wages may be late, and you can’t seize new growth opportunities due to lack of available funds. That’s where accounts receivable turnover ratio (AR turnover) comes into the picture.

Why Is It So Critical?

1. Liquidity: A higher turnover ratio means you collect faster, ensuring your daily operations or expansions aren’t stuck waiting on late payments.
2. Health Indicator: If your ratio is low, it hints that either your credit terms are too lenient or your collection system is failing.
3. Competitive Edge: Having funds at hand means you can invest in marketing, staff training, or product development, outpacing rivals stuck chasing old invoices.

Whether you’re a startup or a long-standing player in the Canadian market, reining in accounts receivable is crucial for stable, predictable cash flow.

How to Calculate Accounts Receivable Turnover

We can break it down step by step. Doing so ensures you don’t mix up the numbers or forget important details.

Step 1: Find Your Net Credit Sales

• Net Credit Sales = Total Credit Sales – Any Returns or Allowances
• Don’t count cash sales, because those never create an accounts receivable balance.
• Ensure you exclude any partial refunds or discounts you gave.

Step 2: Determine Your Average Accounts Receivable

• Average AR = (Starting AR Balance + Ending AR Balancetext{Starting AR Balance + Ending AR Balance})/2
• If you measure monthly, you’d sum the beginning and end balances for that month. For yearly, do it for that year’s start and end.

Step 3: Plug into the Receivables Turnover Formula

Example

Say your net credit sales over a year was $300,000. You started the year with $40,000 in receivables and ended with $50,000. The average is $45,000. So your ratio is $300,000 / $45,000 = 6.67. That suggests about 6.67 cycles of collecting AR per year, or roughly every 55 days.

Days to Collect

If you’d like the “average number of days” it takes to collect, you can do:

In our example: 365 / 6.67 ~ 55 days.

Common Causes of a Low Turnover Ratio

If your ratio is low, it basically means invoices linger unpaid for too long. Let’s see some reasons why:

1. Loose or Confusing Payment Terms

Some businesses allow net 60 or net 90, giving too much leeway. If you’re not clear or if your statements differ from your contract, clients might exploit that gap or simply pay later.

2. Inefficient Invoicing Process

If you wait a week or two after delivering goods to send an invoice, you lose that valuable time. Or if your invoices are missing crucial details (like item breakdown or payment instructions), you risk payment delays or disputes.

3. Inconsistent Follow-Up

Without a routine schedule for reminders—like phone calls or emails—customers might prioritize other bills first. They pay the squeaky wheel.

4. Overly Generous Credit

Granting credit to unvetted or risky clients can hamper your ratio. If they often default or delay, your AR stands idle.

5. Lack of Payment Options

Maybe you only take checks or require a complicated wire transfer. Today’s clients might prefer e-Transfers, credit cards, or online payment portals. If paying is a hassle, it’s easier to procrastinate.

Practical Tips to Improve Your AR Turnover

We’ll go beyond generic advice here, offering real-world steps you can implement.

1. Tighten Credit Policies

• Evaluate potential clients with basic credit checks or references.
• If they seem risky, ask for a deposit or partial prepayment.
• Set shorter terms (like net 15) if it doesn’t jeopardize your competitiveness.

2. Speed Up Invoicing

• Use real-time software that auto-generates an invoice as soon as an order ships or a service ends.
• Send digital invoices so clients can pay with a simple click.
• Include due dates at the top, e.g., “Invoice Due: June 1st, 2025.”

3. Offer Multiple Payment Channels

• Accept credit cards, e-Transfers, PayPal, or other options.
• If your customers are diverse, you might see an immediate speed-up by letting them use what they prefer.

4. Set Early Payment Incentives

• Provide a small discount (1–2%) for paying within 10 days (common phrase: 2% 10 net 30).
• This can drastically raise your turnover ratio if your clients jump on the discount.

5. Follow a Consistent Reminder Schedule

• Send a reminder one week before the due date.
• Another gentle nudge on due date morning if not paid.
• Then put polite email or call if it’s overdue by a certain grace period (like 3–5 days).

6. Automate Where Possible

• Many accounting solutions let you set automatic reminders.
• You can track each outstanding invoice in real time, seeing who’s nearing the deadline and who’s gone past it.

7. Segment Customers by Payment Habits

• For chronic late-payers, consider shorter terms or partial deposits.
• For consistent on-time payers, reward them or keep them on standard terms.
• This segmentation ensures you invest your follow-up energy where it’s needed most.

8. Proactively Manage Overdue Accounts

• If an invoice is 30+ days late, escalate with phone calls instead of just emails.
• Offer to discuss any issues or disputes they might have.
• If that fails, have a threshold where you might consider hiring a collection agency or writing off the balance.

9. Revisit Your Contract Terms

• Spell out everything: who you invoice, how long they have to pay, what interest or fees might apply if they’re late.
• Make it easy for clients to raise invoice questions within a short window, so they can’t hold up payments before claiming they had confusion.

10. Communicate Value

• Clients pay faster when they see the direct value. If:
• They see your product or service as top-quality or essential, they’re less likely to deprioritize your bill.

Frequently Asked Questions

1. What is accounts receivable turnover, and why is it important?

This ratio measures how often you collect your average AR within a set period. A higher ratio means faster collections, improving cash flow and letting you fund business needs more easily.

2. How do I calculate my accounts receivable turnover ratio?

1. Find net credit sales (total credit sales minus returns).
2. Determine average AR (begin + end AR / 2).
3. Receivables Turnover = Net credit sales / average AR.

3. What are the common reasons for a low accounts receivable turnover?

Loose payment terms, chaotic invoicing, lack of follow-up, or credit offered to risky clients. You end up with many overdue invoices and a slow turnover cycle.

4. How can I improve my invoicing process to speed up payments?

Invoice promptly, detail each item, set clear payment terms, and offer easy payment options (like online portals). Automated reminders or software can help too.

5. What strategies can help reduce overdue accounts?

Check customer credit before extending payment terms, use partial deposits, give early-payment discounts, and escalate follow-ups for repeated late payers. If needed, reduce the credit limit for clients who habitually delay.

Conclusion and Next Steps

Improving your accounts receivable turnover ratio isn’t just about pestering customers for payment. It’s about building efficient systems, clear terms, and strong customer relationships that encourage timely settlement. If your ratio is dragging behind industry averages or you constantly chase past-due invoices, it’s time to reassess your credit policies, invoicing approach, or follow-up routine. A few small changes—like automating reminders or offering more payment channels—can help you reclaim thousands of dollars stuck in late accounts.

Action Points

1. Calculate Your AR Turnover: If you haven’t done so, use the steps above to see your ratio. Then set a target (maybe a 15% improvement next quarter).
2. Revamp Payment Terms: Decide if net 30 is better than net 60, or if you can adopt an early pay discount.
3. Use Tools: Accounting software can track outstanding invoices in real time, sending reminders automatically.
4. Follow Up Politely but Firmly: A short phone call or friendly email can push your invoice to the top of your customer’s to-do list.
5. Monitor Progress: Re-check your ratio each month or quarter. Look at your average collection period and aim to lower it steadily.

By focusing on your AR turnover ratio, you not only free up capital for daily operations, but you also protect your business from liquidity crunches that hamper growth. With a clear plan—like setting better terms, automating follow-ups, or rewarding early payers—you’ll likely see your ratio climb, giving you a stable foundation for expansion. Don’t let your profits remain in limbo as “money owed”—turn that into real cash, fueling your next stage of success.

Key References:  

1. Investopedia – Receivables Turnover Ratio
2. Tipalti – Accounts Receivable Turnover Overview
3. Corporate Finance Institute – AR Turnover Ratio Guide
4. Xero – AR Turnover Calculation